Malaysia’s Media Sector: Change In Radio Landscape

We stay NEUTRAL on the media sector in view of the challenging operating environment on the back of the slower adex spending due to the uninspiring consumer sentiment. STAR MEDIA (STAR) entered into a conditional SPA with ASTRO to dispose its wholly-owned Capital FM Sdn Bhd to the latter for RM42m. We were not surprised by the news as STAR had indicated its intention to explore cost-saving initiatives few quarters ago. Overall, we are POSITIVE on the news as both companies appear to benefit from the exercise. We leave our STAR (MP, TP: RM2.60) and ASTRO (OP, TP: RM3.02) earnings forecasts and target prices unchanged for now, pending the completion of the exercise. Meanwhile, we also made no changes to our Media Chinese International (MEDIAC, UP, TP: 0.60) and Media Prima (MEDIA, TP: RM1.35) earnings forecast as well as their target prices. Our MEDIA’s stock rating, however, is raised to MARKET PERFORM (from UNDERPERFORM previously) after the share price dropped below our target price since we downgraded the stock in late-August. We still favour ASTRO among others in view of its relatively resilient earnings and decent dividend yield.

New Captain to Capital FM & Red FM. STAR MEDIA (STAR) had entered into a conditional sale and purchase agreement with Measat Broadcast Network Systems Sdn Bhd (“MBNS”, a wholly-owned subsidiary of Astro Malaysia Holdings Bhd) to dispose its wholly-owned Capital FM Sdn Bhd (CSFB) for RM42m. CSFB holds a Content Applications Service Provider Individual (CASP) license that enables it to operate and broadcast both the Capital FM and Red FM radio stations. Upon completion of the proposed acquisition, MBNS will have an effective equity interest of 100% in Capital FM. While the disposal price is still subject to adjustment (after taking into consideration the quantum of the net working capital of CFSB at the conditional fulfilment date), STAR believes the adjusted price will not vary significantly.

Conditions Precedent. The SPA shall be conditional upon the fulfilment of inter alia, or before the expiry of 3 months from the date or such other date as the parties may agree in writing. The precedent conditions are as follows; (i) obtaining all relevant approvals and waivers (including the regulators, shareholders, directors, etc.), and (ii) the completion of due diligence review by the Purchaser in respect of the Targets (Capital FM and Red FM radio stations), and the results of such review and verification have not disclosed any material adverse issues. Both parties have a right to terminate the SPA should any of the conditions precedent is not satisfied or waived in accordance to the terms and conditions in the SPA before expiration. Details of the Capital FM & Red FM radio stations. Capital FM is the first and only English radio station in Malaysia that is dedicated to women, target 25-34 years old, and living in market centre and other urban areas. Red FM, meanwhile, is a Malaysian English language radio station that broadcasts across Peninsular Malaysia and Singapore. The station is targeted at urban and suburban listeners, playing a selection of the best music from the 80’s and 90’s as well as current favourites. Based on Gfk survey, Capital FM and Red FM command a weekly listener base of 80k (in both Klang Valley & Penang) and 325k (+70% YoY), respectively, in year 2015. STAR spent a total of RM16.5m to acquire Capital FM in 2012 & 2015 and c.RM17m for Red FM in 2003.

Acquisition valuation is reasonable, in our view given ASTRO is able to own a controlling stake in both radio stations, which commands a larger listener base. From STAR’s perspective, the disposal will streamline the group’s businesses to concentrate on profitable operations given the radio segment’s contribution was insignificantly financially. Note that the radio segment contributed c.3%-5% turnover to the group but continued to suffer 5-consecutive quarter of losses since 2Q15. While we expect the disposal to result in some cost savings, STAR’s radio division may continue to face a challenging time ahead as the remaining stations (i.e. Suria FM and 988 FM) still need to bear the fixed costs (i.e. station towers and consoles) as well as lack of economic of scale. From ASTRO perspective, the proposed acquisition is set to increase its listenership base and result in cost benefits from better economies of scale. On top of that, the enlarged listenership base would make ASTRO more attractive to advertisers to cross-sell across its platforms. Post completion of the acquisition, we understand ASTRO intends to re-brand and broadcast these two radio stations via on-air and online platforms. As of 1Q17, advertising revenue accounted for c. 11% of the group’s total turnover, of which 48% came from the radio segment.

Financial impact is expected to be minimal for both companies. From STAR’s perspective, the proposed disposal is expected to generate a net gain of c.RM9m. The proposed utilisation, meanwhile, is mainly for working capital, thus lowering the odds of special dividend. On the other hand, ASTRO intends to utilise internal funds for the proposed acquisition as well as the funding requirement of Capital FM. Note that, ASTRO had a cash and bank balances of RM1.1b as of 1Q17.